More Mortgage Rule Changes - Coming January 1, 2018
October 17, 2017 | Posted by: Roar Solutions
Mortgage Rule Changes – Taking Effect on January 1, 2018
These rule changes were just announced by “OSFI” (the Office of the Superintendent of Financial Institutions Canada). OSFI’s guidelines are mandated on all federally regulated financial institutions. The changes are targeted to uninsured mortgages (non-CMHC insured mortgages). We’ll start with a quick breakdown of the terminology:
Uninsured Mortgage – mortgages with 20% or more equity/down payment
Benchmark Rate – a rate set by the Bank of Canada, at a level much higher than current rates (generally mirroring the 5-year “Posted Rate' at our major banks)
LTV = Loan-to-Value – the amount borrowed relative to the property value. Example, a $260,000 mortgage on a $400,000 purchase would represent “65% LTV”
A new minimum qualifying rate (stress test) for uninsured mortgages will be set
The minimum qualifying rate for uninsured mortgages will be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.
Previously, a 5-year or greater term was qualified at the “contract rate”, meaning the interest rate and subsequent monthly mortgage payment the borrower paid. A higher qualifying rate reduces a borrowers maximum qualification amount.
Lenders will be required to enhance their LTV measurement and limits to ensure risk responsiveness
Federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and updated as housing markets and the economic environment evolve.
This targets lender risk in markets of higher value, where higher property values could see more future volatility in times of market correction. We already see variations of this known as 'sliding scales' where lenders will lend less LTV at higher property values to 'mitigate risk'.
Restrictions will be placed on certain lending arrangements that are designed, or appear designed to circumvent LTV limits
A federally regulated financial institution is prohibited from arranging with another lender: a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.
This targets “bundling” of mortgages where one institution approves a mortgage at, for example, “75% Loan-to-Value” and a secondary lender approves an addition “10% Loan-to-Value” thus lending the applicant a total of 85% LTV. This exceeds the 80% LTV (20% down) threshold where loan amounts above that mark are intended to be insured by CMHC, Genworth or Ganada Guaranty.
In summary, some borrowers will be impacted by the changes more than others. While as an industry, we find some of the aim behind these regulations a bit puzzling, we must also not make a bigger issue out of this than what it actually is. As always, we're here to guide our Clients through all of their mortgage decisions. If you're not already a Client, please reach out to us as we'd be happy to help your reach your goals.